For more than a decade, Europe’s largest crisis-response instrument has sat largely unused, a reminder of a past emergency rather than a tool for present challenges. Now, amid heightened geopolitical strain and mounting defence demands, senior policymakers are openly reconsidering its purpose. The suggestion that the **European Stability Mechanism** (ESM) could be mobilised to support military spending reflects a deeper reassessment of how Europe finances security in an era defined less by financial contagion and more by strategic vulnerability.

With lending capacity exceeding €430 billion, the ESM was originally designed to act as a financial firewall during the euro zone sovereign debt crisis. Its reactivation for defence would mark a profound shift: from shielding economies against market panic to underpinning Europe’s capacity to deter external threats. That transition speaks to how Europe’s risk landscape has evolved—and how its existing institutions are being pressed into new service.

Why defence financing has become Europe’s central constraint

European governments have sharply increased defence spending since Russia’s invasion of Ukraine, but the fiscal burden has fallen unevenly. Larger economies can absorb higher military budgets more easily, while smaller and more exposed states face difficult trade-offs between security, social spending, and debt sustainability. This imbalance has exposed a structural weakness in Europe’s defence architecture: the absence of a common, low-cost financing mechanism comparable in scale to shared monetary tools.

The ESM enters this debate precisely because it already exists as a pooled resource backed by euro zone governments. Its ability to raise funds cheaply on capital markets gives it a financial advantage that individual states—especially those with higher borrowing costs—cannot replicate. As defence spending becomes a long-term structural necessity rather than a temporary response, the question has shifted from whether Europe can afford to spend more to how that spending should be financed.

The ESM was created at the height of the euro zone crisis to prevent sovereign defaults from destabilising the single currency. Its association with austerity and economic reform conditions left a political stigma that has discouraged governments from drawing on it in recent years. Repurposing the fund for defence would therefore require not only legal and political agreement, but also a reframing of its identity.

Crucially, proposals now under discussion emphasise precautionary credit lines rather than bailout-style programmes. The idea is to offer access to funding without imposing intrusive economic conditions, provided the loans are strictly earmarked for defence expenditure. This approach mirrors the ESM’s pandemic-era healthcare facility, which was designed as an insurance mechanism rather than a rescue package.

Such a model would allow governments in sound fiscal health, but under acute security pressure, to reinforce their military capabilities without triggering negative market perceptions or domestic political backlash.

Geopolitics and the erosion of old assumptions

The renewed focus on defence financing cannot be separated from Europe’s changing external environment. Relations with the United States, long the cornerstone of European security through NATO, have become more uncertain. Calls from Washington for Europe to shoulder a greater share of its own defence burden have coincided with explicit signals that U.S. support may be more conditional in the future.

At the same time, Russia’s sustained military posture on Europe’s eastern flank has transformed threat assessments across the continent. Defence is no longer viewed as a discretionary policy area but as a core component of economic resilience. This convergence of security and fiscal policy has made it politically easier to argue that instruments like the ESM should evolve accordingly.

In this context, using a euro zone crisis fund for defence is less about mission creep and more about aligning institutional capacity with strategic reality.

How a defence credit line could work in practice

Under emerging proposals, the ESM could offer dedicated “defence support lines” allowing member states to borrow a defined share of their economic output at favourable rates. Funds would be ring-fenced for military procurement, infrastructure, or capability development, ensuring that they directly contribute to collective security rather than general budget relief.

This structure would address one of the central concerns surrounding defence spending: sustainability. By spreading costs over longer maturities and leveraging the ESM’s strong credit profile, governments could avoid sharp increases in national borrowing costs. For smaller states, particularly those bordering Russia or Belarus, such access could be decisive in maintaining credible deterrence.

There is also scope for collective requests, where groups of countries apply jointly. This would reinforce the narrative of shared responsibility and reduce the stigma historically attached to ESM assistance.

Political hurdles and institutional limits

Despite its financial logic, deploying the ESM for defence faces significant political constraints. Any shift in its mandate would require approval from all euro zone members, including countries with constitutional neutrality or strong domestic sensitivities around military spending. Convincing these states that defence lending strengthens collective stability rather than undermines neutrality will be a delicate task.

There is also the question of scope. The ESM’s mandate is tied to euro zone membership, excluding non-euro EU countries that are among the most exposed to security threats. While this limitation cannot be easily resolved, proponents argue that strengthening the euro zone’s defence capacity would still have positive spillovers for the wider EU and NATO.

An ESM defence role would not exist in isolation. The European Union has already begun experimenting with joint borrowing and lending mechanisms to support defence procurement. These initiatives, however, remain modest relative to the scale of the challenge.

The ESM’s value lies in its size, speed, and financial credibility. Rather than duplicating EU programmes, it could act as a backstop—available when national budgets are stretched or when rapid scaling of defence spending is required. In this sense, the fund would function as a strategic reserve, analogous to how it once served as a financial reserve during market crises.

A shift in Europe’s understanding of stability

At a deeper level, the debate over using the ESM for defence reflects a changing conception of what “stability” means in Europe. During the euro crisis, stability was defined in financial terms: debt ratios, market confidence, and currency integrity. Today, stability increasingly encompasses physical security, supply chain resilience, and the ability to deter coercion.

Reorienting a crisis fund toward defence does not abandon its original purpose; it reinterprets it. If security threats can destabilise economies as surely as financial shocks, then tools designed to preserve stability must adapt accordingly.

The discussion around the ESM suggests that Europe’s policymakers are beginning to accept this broader definition. Whether the fund is ultimately used for defence will depend on political will, but the fact that the option is being seriously considered signals a fundamental shift in how Europe views the relationship between finance and security.

(Adapted from Reuters.com)